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A Dynamic Incentive‐Based Argument for Conditional Transfers *
Author(s) -
MOOKHERJEE DILIP,
RAY DEBRAJ
Publication year - 2008
Publication title -
economic record
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.365
H-Index - 42
eISSN - 1475-4932
pISSN - 0013-0249
DOI - 10.1111/j.1475-4932.2008.00479.x
Subject(s) - economics , bequest , incentive , earnings , overlapping generations model , welfare , human capital , distribution (mathematics) , per capita , microeconomics , labour economics , market economy , mathematical analysis , population , demography , mathematics , accounting , sociology , political science , law
We compare the long‐run effects of replacing unconditional transfers to the poor by transfers conditional on the education of children. Unlike Mirrlees’ income taxation model, the distribution of skill evolves endogenously. Human capital accumulation follows the Freeman–Ljungqvist–Mookherjee–Ray OLG model with missing capital markets and dynastic bequest motives. Conditional transfers (funded by taxes on earnings of the skilled) are shown to induce higher long‐run output per capita and (both utilitarian and Rawlsian) welfare, owing to their superior effect on skill accumulation incentives. The result is established both with two skill levels, and a continuum of occupations.